In March 2018, U.S. President Trump signed into law the introduction of tariffs on imports of steel (25 percent) and aluminum (ten percent). In his election campaign, Trump already announced that he intended to protect domestic industrial sectors against unfair foreign competition and to correct disadvantageous trade relationships. The Trump administration justifies the steel and aluminum tariffs with national security considerations. The tariffs are a further manifestation of Trump’s intentions to aggressively respond to what he considers as unfair trade practices of other countries, particularly those of China.
The European Union (EU), as well as other allies (above all, the United States’ neighbors and NAFTA partners Canada and Mexico) were initially exempted from these tariffs. A few hours before the expiration of the “grace period” at the end of April, Trump extended the exemption for the EU, Canada, and Mexico once more until the beginning of June 2018. According to the White House, the United States had reached agreements with Argentina, Australia, and Brazil by that time, meaning that these countries will be exempted permanently on the basis of soft import quotas. South Korea reached an agreement on the basis of their KORUS free trade agreement after making concessions to the United States.
However, the United States’ major trading partners, which either refused to negotiate at gunpoint or could not reach a deal in time, are now affected by the measures. They all have announced to retaliate and have – to some extent – implemented tariffs in order to rebalance the damage.
Effects on Germany and Europe
The EU is the second-largest producer of steel worldwide. Germany accounts for the largest part of EU steel production The EU must expect increasing imports from other countries as steel trade flows will be diverted to the EU. The aluminum tariffs will have a less drastic effect, but harmful consequences of trade diversion are still expected.
How to Respond to U.S. Tariffs
In response to the tariffs, the EU has several options to consider – safeguard measures, rebalancing measures, and dispute settlement proceedings within the WTO. All these options have now been deployed.
- Safeguard measures: In accordance to GATT Article XIX and the WTO Agreement on Safeguards, the EU initiated a safeguard investigation in March 2018 in order to evaluate whether a surge of steel imports threatens or causes serious harm to EU steel producers. Provisional safeguard measures on imports of certain steel products came into effect on July 19: After the actual import level of the most recent three representative years has been reached, an additional duty of 25 percent will be levied.
- Rebalancing Measures: Additionally in accordance to GATT Article XIX and the WTO Agreement on Safeguards, the EU implemented compensatory tariffs in the end of June to balance the harm caused by U.S. tariffs.
- Trade Dispute Settlement: In the beginning of June 2018, the EU requested consultations with the United States at the WTO as first step of a dispute settlement procedure. After a consultation period of 60 days, a WTO dispute settlement panel may be established. The EU, Norway and several other countries requested on October 18 that the WTO set up such a panel. On November 21, the WTO established seven panels to rule on the legitimacy of the U.S. tariffs under national security exemptions. After the panels are composed, they must rule within nine months whether or not the USA was allowed to impose the tariffs.
The EU does not accept the U.S. justification of a national security threat. Therefore, all three measures do not properly reference GATT Article XXI, which allows for protective tariffs if the national security of a country is in danger. Rather, the EU bases its complaint on GATT Article XIX and the WTO Agreement on Safeguards. In mid-July, the United States filed a complaint with the WTO against the countervailing measures of the EU and other countries. On October 18, the United States requested the establishment of appropriate dispute settlement panels. On November 21, the WTO granted the U.S. the establishment of three panels in disputes over retaliatory tariffs from the EU, China, Mexico and Canada.
An Escalating Protectionism Spiral Would Hurt Everybody
Imports of steel and aluminum do not threaten the national security of the United States. Tariffs also will not strengthen the competitiveness of the country. Rather, they will cost jobs and income in the United States. They will further give rise to retaliatory measures and do not offer a long-term solution effectively addressing overcapacities on the world steel market. The United States risks accelerating a global tit-for-tat spiral of protectionist measures. In addition to the economic losses on all sides, the U.S. government endangers the transatlantic partnership that, for decades, has been characterized by trust, continuity, and a common understanding of liberal values.
German industry thus calls upon the United States to lift the tariffs. Unfair trade practices should not be tolerated. Thus, the EU rebalancing measures are an important signal. The establishment of a dispute settlement panel at the WTO is the right step. However, an escalation of retaliatory measures and tariffs threatens jobs and income, both in the United States and the EU. Therefore, the United States and the EU should return to the negotiation table. The transatlantic dialogue should be strengthened, particularly regarding how to jointly address unfair trade practices and overcapacities on world markets - for instance, within existing arenas such as the Global Forum on Steel Excess Capacity. The creation of a similar forum for aluminum should also be considered.